Winegardner v. Equitable Loan Co.

Weavee, J. Under the date of April 1,1895, plaintiff subscribed for three shares, of $500 each, in the Equitable Loan Company, a corporation organized in this state, and received a certificate reciting, among other things, that in consideration of a sum of $6 per month to be paid until the maturity of the shares, estimated to require only one hundred and eight months, the company would pay the holder $1,500 on surrender of the stock. To this promise was added the following: “Provided, however it is expressly agreed between this company and said stockholder, that when these shares are one hundred and twenty months old and one hundred and twenty payments of six dollars each have been made thereon, these shares shall be matured and if at that time the money to the credit of these shares does not amount to $1,500.00 the deficit shall be paid out of the guarantee fund, or any money belonging to the guarantee stock issued by this company.” On the same date plaintiff received from said defendant $1,500, the repayment of which she secured in the following manner: (1) by a note as follows: “$1,606.50487 Ottumwa, Iowa, April 1, 1895. For value received we promise to pay to the order oí the Equitable Loan Company of Ottumwa, Iowa, at its treasurer’s office in Ottumwa, Iowa, sixteen hundred and six and fifty one hundredths dollars as follows: The sum of thirteen and fifty one- hundredths dollars on the fifth day of each and every month for the full period of one hundred and nineteen months commencing April 5, 1895. Said monthly payments consisting of the following items: Six and no hundredths dollars monthly dues on capital stock of said company evidenced by certificate No. 683 this day pledged by me to said company to secure this loan and seven and fifty one hundredths dollars the same being monthly interest due on loan, and further agree in case of defaultin' monthly payments of said sums of money or any part thereof at the times and according to the terms of this obligation to pay fines and penalties assessed against us by the said company on the account thereof in accordance with its by-laws and rules or any of the by-laws and rules that may hereafter be passed or established, and in case of default, if the stock pledged, the security given to secure said sums of money and said monthly payments, shall upon the foreclosure and sale thereof be insufficient to pay said company in full, we promise and agree to fully pay and discharge the s^me. Ella Winegardner.” (2) By another note, for $8('2.50; being, as therein stated, the sum of $7.50 per month for the full period of one hundred and nineteen months for premium bid for the right of precedence. in receiving the loan. (3) By another note, for $1,500, payable six years after date, with six per cent, interest, payable semi-annually. (4) By a “mortgage deed” of certain real estate, securing the payment of the $1,500 note above mentioned. And (5) by a mortgage on the same property, securing the other two notes above described, and reciting that it is made subordinate to the $1,500 lien. — 488 — Prior to May, 1900, plaintiff had paid upon the contract evidenced by the foregoing obligations the aggregate amount of about $1,275, and, desiring to make payment in full, tendered the company the sum of $502.50, as the unpaid balance; and, the tender being refused, this action w.is begun. In addition to the foregoing, she alleges that the contract of loan was usurious, that there was in fact no bidding for pre'cedence in obtaining the loan, but said so-called premium was arbitrarily fixed and inserted in the contract as a pretext to conceal the real character of the transaction. She further asserts that the shares of capital stock issued to her were of a class known as “A” stock, which by its terms gives preference to its holders over the holders of other stock, and by reason of such preference they are void and worthless, and afford no consideration for the obligations given by her. §he further alleges that in May, 1900, the company failed in business, went into liquidation, and failed and refused to carry out it's contract. The answer of the Equitable Loan Company admits the loan and the making of the several instruments already described, and admits that the stock issued to the plaintiff provided for preference over the holders of other stock. It alleges that after giving plaintiff due credit for all her payments, and value of her stock, there is still due a balance of $1,258.57, for which amount it asks a foreclosure of its mortgage. Thereafter the appellant filed a pleading alleging that the Equitable Loan Company had gone into liquidation, and that in winding up its affairs he became the purchaser, and is now the owner of the notes and mortgage in suit. Be adopts the allegations and claims made herein' by the company, and alleges that plaintiff, By accepting the certificate of stock and making payments thereon, is estopped to deny its validity. Other matters are pleaded by the parties, but the foregoing embodies all that is essential upon this appeal. — 489 — There is no controversy but that the stock issued to plaintiff, by which full payment was guarantied at a fixed time, was part of a limited class which was issued in the ■earlier history of the company; but, this plan of business having been disapproved by the executive council, the practice was later abandoned. It is also conceded or conclusively shown that plaintiff has paid upon the various installments required of her, pursuant to the several ■obligations given the qompany, the sum of $1,260, and a membership fee of $15, and that she has since made the tender of $502.50, as pleaded. There is no claim that there was any competitive bidding in awarding the loan to the plaintiff, but a’subsequent legalizing act by the legislature is relied upon to avoid any plea of usury based on such omission. I. The appellant’s claim of right to enforce a performance of plaintiff’s contract according to its terms rests upon the proposition that the transaction is within the ■i issuance °tf0ffcTp?werd of association. protection of the statute relating to building and loan associations. To be entitled to this prof¡ecti0n, it must appear that the corporation was an association - of that character, and that the •contract which it seeks to enforce is of a kind which it was •authorized to make. As an alleged building and loan •corporation, it is claiming to exercise rights and privileges ■which are denied to corporations and individuals generally; and, to obtain judicial recognition of these exemptions or exceptions from the general rule, it must bring itself and its contract within the terms and conditions which are precedent to the exercise of the exceptional privilege. For the present, we will assume that the ■Equitable Loan Company was in its lifetime a building •and loan association. It is unnecessary for us here to go •into any dissertation upon the generakscope' and nature of these enterprises. It is sufficient for present purposes to .say that the fundamental idea upon which the whole struc — 490 — ture bas been erected is that of mutual profit sharing by all members, whether borrowers or nonborrowers. Such an organization has and can have no “capital,” in the ordinary sense of that word, except the contributions made from time to time by its shareholders; thus constituting a, fund to be loaned or advanced to members desiring the-same, and presenting the requisite security, bio share of' stock in such association can be worth more at any time-than the sum of the installments which have been paid thereon increased by its proportionate part of the profits, earned. In other words, no share can ever be legitimately “matured” until the aggregate of such payments and earnings is equal to its par value. When that time comes, the-stock is retired by operation of law, and the holder ceases, to be a member, and becomes a-creditor of the corporation, for the face value of his certificate. In the very nature-of thiugs, it is impossible for the corporation, its officers- or agents, to know in advance the precise date when stock may be matured; and if an issue is made upon an agreement to pay or redeem it at par at a date certain, and the earnings prove insufficient to make good the contract, one of two results must follow: The corporation must confess its insolvency, or by some scheme or device cast the loss-upon the remaining holders of. its stock; thereby reducing-their profits and postponing the maturity of their own shares. A transaction whmh leads to such results is certainly not within the spirit or intent of the law which authorizes the existence of these associations. We come, then, to the inquiry whether the transaction-, between plaintiff .and the Equitable Loan Company is open to the objections here considered. B.y the terms of the certificate, it is first agreed that at maturity, estimated to-require only one hundred and eight months, the corporation will pay the cfrtificate.holder the full sum of $1,500. It then provides that one hundred and twenty months, shall be the extreme limit of the time for maturity, and,. — 491 — if at such date the “credits” upon the stock are insufficient for payment in full, the deficit is to be made up from the guaranty fund. That this agreement gives, or attempts to give, the holder of the stock thus issued “a preference over the holders of other stock in the company,” is very clear, and is expressly admitted in the pleadings. It is true, as contended by appellant, that at the date of this contract there was no provision in our statutes expressly forbidding or expressly authorizing the issuance of stock with a “guaranty” or definite payment feature. Indeed, at that time the necessity and propriety of strict and definite statutory regulation of this business had not appealed to the legislature, and the provisions then existing for that purpose were exceedingly meager and indefinite. But building and loan enterprises had for many years been carried on in this and other states, and their status, character, and limitations were already reasonably well settled by the courts. In the absence of express statutory regulations, we think a corporation organized to do a building and loan business would therefore be restricted and controlled by the principles and rules which have obtained general judicial approval. The question presented in this caséis not to be disposed of by reference to the law which permits ordinary corporations to issue “preferred stock.” While both classes of corporations may be organized under the same general chapter of the Code, the nature of their business, the powers conferred, and the ends to be attained are so radically different that argument by analogy is apt to be misleading. Preferred stock, generally speaking, is an issue of shares upon which a stated dividend from the corporate jjrofits is to be paid before any distribution is made to the holders of common stock. If there be no profits, there is no dividend to either class. If the profits be small, the preferred stock may absorb them all; but, if great, the preferred stock receives no more than the stipulated dividend, and the common srock may jjrove the more profitable. This — 492 — plan, which is entirely compatible with an ordinary business undertaking, is essentially destructive of that “mutuality, reciprocity, and equality” which is so often declared to be the controlling idea of the building and loan business. But the scheme of a “guaranty fund” adopted in the present instance is based on no plan for the distribution of profits. As disclosed by the evidence, that fund was created by setting apart a definite portion of each and ■every installment paid by members upon their stock subscriptions. It was further supposed to be strengthened by ■holding in reserve the entire proceeds of the sale of another class of stock, known as “guaranty stock,” to be applied to the same purpose if necessary. It is manifest that such a fund represents no profits whatever, but is in fact a part of the principal invested by the shareholders generally; and the process of-thus “maturing” shares does not differ in iirinciple from one by which, when the ■agreed date of maturing a guarantied share arrives, and the profits are insufficient to pay in full, the deficit is assessed or levied upon the entire membership. By this scheme, even though there were not a dollar of profit earned {a result which recent history shows is by no means impossible), yet the preferred holder of a guarantied share at the end of one hundred and twenty months would withdraw his entire investment of $240, with an “unearned ■increment” of $260, taken directly from the pockets of hi-; fellow members. Surely the legislature could not have believed or understood that business of this kind was included within the powers granted to building and* loan associations, and if, in the stress of competition for business, an association assumes to enter into a contract so foreign to the idea which the law is intended to promote, sound public policy forbids that it be allowed to claim therefor the peculiar privileges and immunities which have been ■ granted for' the pro'ection and encouragement of business within the legitimate scope of their — 493 — organization. .It is no answer'to these objections to ■sav. ~s is suggested by counsel, that, while the company’s pro. .i=e was to pay at a date certain out of a particular fund, there was “no undertaking that this fund would be sufficient to make good the deficit.” Possibly that answer would be pertinent and sufficient if the stock had been matured by one hundred and twenty payments, and this was an action to recover the face value thereof frbm the corporation upon its promise, but that is aside from the question before us. In Sumrall v. Columbia F. & T. Co., 20 Ky. 1801 (44 L. R. A. 596, 50 S. W. Rep. 69), the plan of the association was very similar to the one, we are now considering. The association becoming insolvent, the holders of the guarantied stock sought to be given preference- in the distribution of the assets. The relief was denied; the court, among other things, saying: “When we bear in mind that the corporation we are dealing with is a building and loan association, with certain underlying principles of co-operation,,, equality, and mutuality in its make-up, not common to ordinary corporations, and which may be termed the common law of its existence, the objection to upholding preferential contracts among members becomes apparent. All such attempts are absolutely void, as contrary to the natural law of such associations.” Dealing with the same question, the Supreme Court of Illinois'says: “The plan of issuing stock containing such agreements is entirely foreign to the purposes of the cor-' poration contemplated by the statute, and .we cannot but regard them as of no force or effect.” King v. International, etc, 170 Ill. 135 (48 N. E. Rep. 677). Many other authorities of like nature could be cited, but the piinciple announced seems so reasonable, and. so consonant with well-recognized requirements of public policy, which hold these and other corporations to fair observance of the limitations by which their power to contract is bounded, that further quotation is not called for. — 494 — II. The plea oí estoppel is not well founded. The fact that plaintiff made numerous payments upon the stock induced no act or change of condition on the part of Estoppel. the company, nor has it been prejudiced by ¿e]ay_ g]je .was morally, if not legally, bound, in any event, to return the money she had received. That duty she has performed, and she is entitled to a discharge of the mortgage liens, unless we find the contract is to be enforced according to its terms, under the building and loan statute, which, as we have said, cannot be done. III. The legalizing act (chapter 48, page 32, Laws 27th General Assembly), has no application here. That act provides, in effect, that ■ section 1898 of the Code of 3. preferred stock: legalizing act. 1897 shall apply to outstanding contracts of . • building and loan associations. This legalizes, as we have already repeatedly held, the system of premiums, fees, and fines which are recognized by said section 1898, and by theuse of.which high rates of interest were exacted; but there is no provision in the Code of 1897, or in the act of the Twenty-Seventh General Assembly, which directly or by implication gives validity to an issuance of preferred stock, or to discrimination between shareholders. IY. While we hold the mortgages and notes unenforceable as a building and loan contract, under our ■statutes, it is not necessary for us to consider whether any such general invalidity inheres in the contract that it may not be enforced as an ordinary loan. Plairitiff has chosen to treat the claim against her as enforceable to that extent, and has made a sufficient tender on the basis of such computation. This, we think, is the extent of the rights of the assignee of the company, and the decree of the district court is therefore aeeirmeb.